Apruve Provides Credit Management as a Service

Apruve Provides Credit Management as a Service

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Michael Noble, CEO of Apruve

Business buyers want payment terms from their vendors, and B2B sellers want to offer them. After all, extending a line of credit to a customer can lift sales and promote loyalty. Michael Noble, the founder and CEO of Apruve, says, "We see about 2.2 times more order frequency and about 3.3 times more line items per order for customers that are given a line of credit versus asking them to pay with a credit card." It's no surprise that upwards of 80% of B2B transactions involve customer credit. That said, offering payment terms has a downside, which Apruve seeks to mitigate by offering credit management as a service (CMaaS) to B2B sellers.

Few people go into business in order to underwrite credit, send invoices, manage collections, and spend evenings doing bookkeeping. Furthermore, as companies grow, so does their average accounts receivable balance. While offering payment terms can accelerate growth, it can also exacerbate the need for external financing. Finally, extending credit can be risky. Sometimes, customers can't or won't pay their bills.

What if you were able to get the benefit of offering terms to your B2B customers and sidestep the administrative headaches and working capital financing requirements? That's the value proposition of Apruve and other emerging fintech companies specializing in B2B payments.

Dave Bayless: Michael, what does Apruve do and what problem does it solve?

Michael Noble: We manage and finance B2B credit programs. Our customers are manufacturers, distributors, and wholesalers—sometimes retailers, but you have to be doing B2B. For hundreds of years, businesses have done business with other businesses using lines of credit. So a buyer comes into a seller and makes a purchase but they don't pay for it. Instead, they pay in 30 days or 60 days or whatever the term is they have negotiated. This causes a number of headaches and issues for the seller.

From a financial standpoint, this purchase is now recognized as a receivable, so it sits on their balance sheet. It's cash that they don't have but they're promised, and that receivable needs to be managed by a back office team known as an accounts receivable person doing invoicing at the correct time, credit approval of that business to extend them that line of credit, cash application, payment processing, all that stuff. These are pretty human-driven endeavors and pretty burdensome from a financial standpoint.

Apruve wrote software that automates that entire process—from underwriting a buyer with credit approval, to order capture, invoicing, and payment. Then we underwrite the orders that those buyers make through third-party banks, so the seller is actually paid within 24 hours, even though the buyer is getting 30 or 60-day terms.

Dave: Across that range of B2B sellers, is there such thing as a typical seller for Apruve?

Michael: Our customers are across the board. We have Fortune 500 customers like Texas Instruments, and we have small million-dollar or smaller manufacturers or distributors of products.

People view accounts receivable pain differently. Some people are just tired of having a room full of humans doing these processes. Every time a human touches an order, you're—in theory—losing margin on that order. So, automating that process becomes top-of-mind for tech-savvy companies. For other people, they're just tired of being a bank and lending to their customer. It's not what they do, so that is a pain point that brings them to us as well.

Typically, a customer for us is someone who's extending terms to their buyers, currently. They're doing it because it drives sales. But, they've come to the realization that it's not their core competency. It's not what they're good at. It's difficult to manage, and it's expensive from a cash flow perspective to do. That really drives them in our direction to automate that process and get out of the way of the financing component.

Dave: I imagine on the flip side when you think about the B2B buyers who wish to purchase on terms, there's a wide variety, or is there a typical buyer?

Michael: No. It's one of our challenges, as a company. B2B, as a whole, is just such a broad definition with thousands of verticals inside of it. So a distributor of handheld radios has a very different customer base that includes government entities, police stations, schools, fire departments, public companies, warehouses. On the other hand, we just signed a pet gear kind of wholesaler, and their customers are all independent pet stores. One of our challenges is understanding the risk profile and underwriting procedures of those particular buyers.

You know, we view every customer as a portfolio of risk. So we do a lot of due diligence prior to engaging with someone to make sure we do understand that customer profile. I can only speak to our experience. We're underwriting buyers everywhere from public companies to government entities, schools, police stations, churches. International is a request that we get often, and we're launching our international buyer strategy in July of this year.

Dave: You mentioned Apruve as doing credit underwriting for a buyer who wants to purchase on terms as well as providing the administration platform to make the process of extending credit more efficient. Do you provide the funding of the receivables or is there a third party involved?

Michael: The analogy that we use a lot is Visa. Visa is a credit network designed primarily for the consumer world. On the back of your Visa card, it says, Wells Fargo or Chase or US Bank, etc. So Visa is the credit network and they use third-party underwriters to fund and finance credit programs or consumers. When you use your Visa card at Target, your money actually never goes to Target. Visa captures that order, routes it to an underwriter, and that bank pays Target. Then you pay the bank a month later.

Apruve is a similar mechanism but designed for B2B, where that point-of-sale terminal doesn't necessarily exist. Businesses are placing orders through ERPs, with customer service reps, or through e-commerce, and our API captures those orders.

We are not the underwriter. We're routing buyer information and order information to a third-party. We focus on being a software company and a good marketing and customer service business. The underwriting and movement of money is a highly regulated space. Like Visa, we chose to work with industry experts with the experience and resources to be able to make sure that we can be efficient in what we do as well as compliant from a regulatory standpoint.

Dave: Speaking of Visa and credit cards—in the situation where you are a small-to-medium-size manufacturer selling to a large customer like Walmart, you'll conform to the payment terms dictated by Walmart. On the other hand, if you are a dog supplies wholesaler who sells to many small retailers, what's the advantage of using Apruve versus asking buyers to pay with their credit cards?

Michael: I think it varies by vertical and order size. The general answer is that corporate accounts drive sales. We've proven that in our data, and some of our customers have shared their data with us. We see about 2.2 times more order frequency and about 3.3 times more line items per order for customers that are given a line of credit versus asking them to pay with a credit card. So it's a sales tool. It builds loyalty, and it makes it harder for your customer to go to your competitor if you are giving your customer terms.

We have a prospect in our pipeline right now that's about a $2 billion entity that does not accept credit cards. Flat out, the prospect said, without hesitation, "Offering credit is my competitive advantage." His problem is that it's a painful competitive advantage for him to manage. So, looking at services like ours allows him to keep that competitive advantage but get out of the way of the management and the financial component of it.

We don't walk into a deal and tell a prospect that they should not take credit cards, but getting their customers on account, most businesses realize, is an advantage. And the customers we have the most success with are the ones that view credit as a sales tool and really try to drive adoption and push their customers in that direction.

Dave: For those sellers who are ready to outsource their B2B credit process, what's involved? How do they get started?

Michael: Again, every situation kind of varies. We don't walk in and say, "We need all of our accounts receivable." We do that with some customers but with others, we're just taking a percentage or a piece of their portfolio and grow from there.

There is a technology component to get started so we have a number of plug-ins that fit into ERP frameworks or e-commerce environments. We also have an open API. It's a customized environment.

Legally, with any lending situation, we have to go through KYC with the seller—know your customer, due diligence, getting financial history. We really trying to understand the health and wellness of that seller. That matters to us and our underwriter just as much as the health and wellness of a buyer. We're also looking for "bad agent" kind of stuff and past bankruptcies and judgments.

We're fairly picky about who we chose to work with as well. If someone's ship is on the way down and the financials kind of show that, it becomes a more challenging environment for us to be successful in. So we're really looking to partner with good, healthy sellers that want to use lines of credit as a competitive advantage. So those are the two big steps—one is technology and then the second is the KYC.

Dave: Once that's in place and the seller is ready to start offering payment terms to its buyers, how does the buyer onboarding process work?

Michael: It's very straightforward. The application for credit is an online form. It's served up by Apruve but it's branded for our seller. We're not a pure white label. The application says "Powered by Apruve" at the bottom, but all the branding with invoices, statements, emails, and credit applications is really focused on our seller.

We're collecting very basic information: business address, EIN, DUNS number if you have it, and the accounts payable contact. We do not collect any owner-specific information with the exception of sole proprietorships. Ninety-nine percent of the time, we are looking at the credit history and wellness of a buyer's business. We're not diving into the owner's personal credit score.

The buyer approval process can take anywhere up to a single business day. We're kind of on our path, right now, to work that down to about four hours for approval. The buyer gets an email, "Welcome to your corporate account on Widgets 'R' Us. Your credit limit is $100,000." They click a link to accept the line of credit. Then they can set up a purchasing team and add a bank account to pay invoices. They're good to go.

Dave: You touched upon this but how are buyers invoiced, and how do they remit payment?

Michael: They receive an invoice after an order has shipped. From an API standpoint, we're collecting that shipment notification from our sellers, and that's what we use to generate our invoice. The invoice gets routed to the buyer. It's all electronic—it's email based with a number of links to pay in various ways. There's also a PDF attached to the email.

Our preferred method of paying an invoice is electronic. A buyer can do that through very standard ACH debit. But being B2B, we do accept checks as a form of payment. The checks are sent directly to the underwriter.

Again, the sellers have already been paid which is another advantage. They're just not handling payments from buyers anymore. We are.

It's a pretty straightforward process. We're sending email payment reminders when the 30-day term— or whatever the program would be—comes up. The buyer makes a payment, and the invoice gets closed automatically.

Dave: It sounds like a modern version of the old lockbox system.

Michael: Yup, it is. And checks…I mean, if you look at the data, the B2B payment data for the U.S., checks are still the predominant method. It's decreasing, but ACH is not projected to surpass checks for another two to three years. In Europe, it's the exact opposite. Electronic payments are much more ubiquitous. For whatever reason, here in the U.S., the adoption rate of electronci payments has been a lot slower.

Dave: You mentioned there is a range of terms a seller can offer its buyers.

Michael: Our standard programs out-of-the-box that we default to are net 30. I make an order today, I pay it in 30 days. Alternatively, we offer end-of-month net 15 for our consolidated invoicing product. So if you make 10 orders in February, you receive a statement on March 1st for all 10 orders, and it's due on March 15th. Then, you can make a single payment against multiple invoices. So really, terms are driven by our seller as a function of the kind of program that they want to offer, and it really is driven by order frequency.

We just signed a deal with a distributor to the restaurant and hospitality industry, and some of their customers are buying daily. No one wants to get 30 invoices due at 30 different times, so a consolidating invoicing product makes more sense there.

We do extended terms. We can do standard net 60. The pricing model changes, we're lending for a longer period of time. In addition, we've done a few custom one-offs per request from the seller.

Dave: What happens, for instance, when a buyer runs up against the credit limits set by Apruve?

Michael: We actually run into this all the time. Both the buyer and the seller have the ability to request an increase in their credit limit. That's just done through their web portal. When we receive that increase request, it's not rocket science. We take a look at their purchase history and their repayment history. We may ask the buyer for additional documentation—things that we couldn't see in the database such as their financials.

A good example of that eventuality is due to seasonality. We have a bike parts distributor, for example. In the spring, there's the potential for buyers to need larger limits. Another use case is just a single one-off order that's kind of an anomaly. We'll get a heads-up from the seller, "Hey, we need to place this $100,000 order for so-and-so." Even before the order is placed, we'll do the due diligence around raising so-and-so's credit limit. So it's not an abnormal request to have. We've gotten pretty good at figuring out the various ways to process those requests and make them happen.

Dave: Let's turn to the dark side for a moment. What happens when there's a collection problem?

Michael: I guess our typical window—picture 90 days out from a standard net 30 invoice—if an invoice goes 90 days past due and we are unable to collect for whatever reason and there hasn't been a dispute or something of that nature that the buyer has expressed to us, we do two things. First, we turn the buyer's credit limit to $0. Simultaneously, we let the seller know that we're doing that. That does not preclude the seller from doing business with that buyer, it just precludes us from underwriting that buyer any further.

The loss risk is handled by the underwriter. This is a nonrecourse product, so we are not going back to our seller saying, "You now owe us this money." Once we underwriting that buyer, that is our risk to collect on.

Dave: So how does Apruve get paid and who pays you?

Michael: We've built a business model and a business case similar to credit cards. People understand credit card rates.

Our pricing is in the 2.x% range. We take a percentage of the invoice. The seller is paying that fee. We take a percentage of the invoice, and we share that percentage with the underwriter. It's the exact same thing Visa and those underwriting banks do with their B2C credit network.

Dave: When I was preparing for our conversation, I noticed the references on your website to financed and non-financed service options. What's the difference?

Michael: Financed means that we have an underwriter involved, and that the seller is being paid 24 hours after an invoice has been generated. Non-financed means that a seller is using Apruve to manage their credit program, but they are assuming all of the risks. That is, they're underwriting the buyers.

With a non-financed program, the seller can create and give a buyer a billion-dollar credit limit. That is totally up to them. If that buyer pays, great. If they don't, it is up to that seller to collect. They get paid when the buyer pays. So if the buyer is on a 30-day term, the seller will attempt to get paid in 30 days. With a financed program, the seller wipes their hands of that risk, and they're paid within 24 hours.

The programs have very different price points. The financed program is obviously more expensive. It is in the 2.x% range, and the non-financed program is typically less than a percentage point. That said, the financing piece is really the pain that we solve for.

Dave: One of the advantages of having a platform such as Apruve is that you get to see a lot of a lot. What surprised you about the evolution of B2B e-commerce in particular?

Michael: History says that B2B is typically 10 years behind B2C in various technology adoption curves. I'm speaking at a conference in a month called HIDA (Health Industry Distributors Association). The conference is all about e-commerce. It's the first such conference HIDA has ever held, and it was extremely well received. People signed up for it immediately. We've been doing some research on member companies, and they're signing up for a reason.

The most surprising thing is how much catch-up so many people are trying to do. They're finally realizing that their buyer profiles are changing. A procurement officer at a dental office is probably used to shopping at Amazon every day and not faxing in an order. As the supplier to that dental office, they need to really start thinking about changing their ways and making investments in new technologies. It's happening, but the pace in B2B just tends to be a little slower in terms of how these companies are evolving.

Dave: Let's shift to the future. What trends do you believe are going to be important in the next few years?

Michael: The buyer profile is changing. And if you're a seller and you're not recognizing that then you're going to get passed by a more innovative company that's able to target that buyer and make their job easier, which is what we're all trying to do. That's going to be important.

I think there's always going to be market leaders that are setting the stage. Amazon, from an e-commerce standpoint, can never be ignored. What they're doing in B2B has caught a lot of people's attention, and if they hope to compete at Amazon's level, they're going to need their own strategy.

In 2020, from an e-commerce perspective, the forecast is something like $1.5 trillion in sales in the U.S. alone and close to $13 trillion worldwide. It's a trend that's not stopping. B2B is growing, I think, at about three times the rate of B2C. We work within both online and offline environments. We had to make sure that our API worked with any ERP frameworks for offline ordering just because this adoption curve is still taking place, and e-commerce is not ubiquitous yet.

Like Visa for B2B Commerce

Consumer credit is a huge, established industry. Payment networks such as Visa offer consumers the opportunity to buy now and pay later. Of course, the B2C buyer doesn't pay the retailer. The cardholder pays the bank whose name is printed on the back of her Visa. Instead, the retail seller is paid by the bank—less a transaction fee in the range of 2-3%.

Retailers sell products and services. Banks underwrite and manage credit to customers. Everybody plays the role they want to play. Electronic point-of-sale (POS) systems allow the payment network to run efficiently.

Historically, that's not been the case in B2B commerce. Sellers provided credit to customers and borrowed from the bank to finance the resulting accounts receivable growth. It was a slow, cumbersome, and expensive process. Worse, it's been largely manual. Orders were submitted by phone or fax—until recently there was no equivalent to an electronic POS system. Consequently, invoicing, collections, and cash application accounting was labor-intensive.

Apruve seeks to be the Visa of B2B commerce. B2B customer credit is still underwritten on a seller-by-seller basis, but banks do the underwriting. ERP, accounting, and, increasingly, e-commerce systems play the role of the POS system. Apruve coordinates the information and money flows and automates the invoicing and remittance processes.

B2B sellers can offer terms to their customers, but now they can receive their money (less a 2-3% transaction fee) within 24 hours rather than 30 or more days. Furthermore, sellers no longer have to manage accounts receivable or collections. Because there are no accounts receivable, the seller's working capital requirements are reduced as is their need for external financing.

The Apruve Payments Process

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Apruve is a technology-enabled payment network that connects B2B sellers, buyers, and banks. To the extent possible, information and cash are moved electronically and automatically. Apruve, however, can accommodate manual actions such as payments by check.

Step 1: A B2B buyer completes a "Powered by Apruve" credit application on the seller's website. The application is forwarded to an underwriting bank, which approves a line of credit and payment terms within 24 hours.

Step 2: The buyer places an order according to the seller's normal procedures (i.e. online or by phone, fax, or email).

Step 3: The seller ships the order to the buyer. Simultaneously, a shipping confirmation is sent by the seller's ERP or e-commerce system to Apruve. Apruve sends a seller-branded email invoice to the buyer.

Step 4: By the next business day, Apruve facilitates the payment of the invoiced amount less a "2.x%" transaction fee to the seller.

Step 5: Per the terms of the line of credit, the buyer remits payment directly to the bank.

The seller or buyer can request an increase in the line of credit at any time (e.g. to accommodate an abnormally large order or seasonal needs). Furthermore, the seller can always choose to extend credit to a customer beyond the limit established by the underwriting bank. Of course, the seller assumes the repayment risk on such extensions.

The Relative Cost of CMaaS

Of course, credit management as a service isn't free. The question is whether it's worth its price. At first blush, the cost of CMaaS appears to be roughly on par with the cost of administering customer credit in-house:

At first glance, CMaaS seems to be about equal to the cost of in-house credit management.

(The preceding reflects my estimates of representative costs. Download the spreadsheet to input your own assumptions.)

However, there are advantages to CMaaS that may not be reflected in the comparison of directly observable costs:

It's tough to adequately account for the cost of management's time and attention—including the distraction of seeking external financing to fund growing working capital requirements.

CMaaS converts the fixed cost of administrative overhead into a variable transaction fee. That's important for a niche producer dependent on market differentiation. Fixed costs compel us to be unfocused.

Being a creditor to your customers can be uncomfortable. Do you really want to be a bill collector?

At worst, CMaaS is probably no more costly than managing accounts receivable in-house. Even then, outsourcing your credit management and accounts receivable financing offers qualitative and strategic advantages—including the quality of your business life.